In the end, it may have been a combination of things. But something, one thing, will be seen as the #1 reason. What is it?
* Exhaustion (no more suckers and greater fools)
* Awareness (MSM, blogs, conversations)
* Interest rates (coming up on 7% for a 30-year)
* The shoe-shine guy test (and bartenders, strippers, etc)
* Building inventories (3.5 Million unsold in the US, 50,000+ in Phoenix alone)
* Fear of losing money (see "Awareness")
* David Lereah looking like Baghdad Bob
My vote? Awareness.
July 05, 2006
What popped the housing bubble?
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22 comments:
rates, affordability was the trigger.
awareness played a role, but that has grown in step with rates, etc.
inventory is a symptom, not a cause, of the bust
Hi, folks
The fundamental cause for all financial busts is always the same - people want to be rich a.s.a.p. without hardworking.
Low interest (a.k.a "Easy money") is just opportunity many want to explore.
All are correct. The person who will get the blame is Ben.
Greed!
I say interest rates, that has the greatest effect on the just-tell-me-the-montly-payment consumer. He could care less about the rest. His buying decisions are motivated by impulse and monthly payments. He is easy to spot, he is the guy with the new car and the sucker's $2000 mattress. He probably makes half what you make and spends twice as much. You may think he is the foolish one but he is the one living it up.
You cannot talk a bubble down, it is an irrational exuberance. You cannot do something to deliberately pop a bubble. If bubbles were subject to rational forces they wouldn't become bubble. Therefor whatever popped the bubble was accidental/incidental and emotionally based. Therefor it was the Democrats who in their disgust with the state of current politics have tried to inflame the passions of Americans by trash talking the entire nation until some people here and abroad actually started believing their rhetoric. Yup, it was the Dems and their lapdog mainstream media buddies.
Exhaustion!
At the top of the Tulip mania, there was no interest rates hikes, MSM, or even David LIEreah....and it popped!
This bubble was created by low interest rates and lowered standards in lending. That's it. That's the root cause. The force behind the bubble.
Most people don't have the independent ability to overpay for a home because very very few pay cash. Its all financed. They pay what the bank says they can pay.
Once interest rates started to rise and ARM loans started to tighted, that was it.
Because this housing run up is like none other in US history, it has attracted every possible warm blooded animal that could possibly buy a home. That means there are very very few buyers left in the US right now. The last 2 years have been suckers who in normal times would never have been given the option of owning.
So who's going to be buying homes over the next 2 or 3 or whatever years?? Answer? Nobody. Thats what is going to bring this baby down FASTer than previous cycles. 2 to 3 years to the bottom in the major markets (coastal, pheonix etc).
Once lending standards return to historical norms, THERE ARE NO MORE BUYERS AT THESE PRICES. Think about it.
from http://nnjbubble.blogspot.com/
A 'Loud Pop' Is Coming,
From the Wall Street Journal:
Surviving a Real-Estate Slowdown (No Link)
The real-estate market shows signs of slowing. Is there deeper weakness ahead? Fewer questions are more important to mutual-fund investors. Many own funds with real-estate-related shares -- not to mention homes and vacation properties. And many economists believe a slowdown of the housing market could hurt the overall economy.
To get a lay of the land, we tracked down Kenneth Heebner, who since 1994 has managed the $1.2 billion CGM Realty Fund. It has the best 10-year record of all real-estate-focused mutual funds, according to fund tracker Lipper Inc., up an average of nearly 22% a year during the past decade, well more than double the broader market. The fund also has one of the best one-year records, up 32% through June 30.
...
Mr. Heebner, 65 years old, is better positioned than many real-estate fund managers to speak about prospects for the housing sector. His fund has viewed its mission more broadly than most rivals, so he isn't shy about ditching real-estate stocks. Among big holdings for CGM Realty during the past year: coal-company stocks, a hot category that qualifies in Mr. Heebner's view because coal companies own a lot of land. He also runs three other mutual funds, including CGM Focus Fund, so he spends a lot of time looking beyond houses and hotels to other parts of the economy. These three funds have among the best five-year records in their categories.
...
WSJ: How is the housing market?
Mr. Heebner: A significant decline in prices is coming. A huge buildup of inventories is taking place, and then we're going to see a major [retrenchment] in hot markets in California, Arizona, Florida and up the East Coast. These markets could fall 50% from their peaks.
WSJ: What has you so concerned?
Mr. Heebner: I'm worried that more people will default on their mortgages. Risky mortgages such as interest-only and pay-option adjustable-rate mortgages require no principal amortization and in some cases payment of only a fraction of the interest due, have been widely used in the last two years. Some people got 100% financing for their homes. It made the tech bubble look like a picnic. When housing is going up rapidly and you can buy far more than your income can support, some people are eager to make big profits by extending themselves financially.
As housing prices fall more people will be under water, and these people are just going to walk away from their homes. They are going to say, 'I'm outta here.' You're going to see increasing foreclosures over the next several years. As [home] prices come down, it will create a difficult environment for home builders.
...
WSJ: More than 25% of homeowners don't have a home mortgage because they own their property outright. Won't this keep problems in check?
Mr. Heebner: Most people won't have problems and much of the country will be fine. I don't think anything will go wrong in places like Texas, Iowa City or Minneapolis. ... But prices are being set by a minority of participants in the market, [those who have borrowed the most and used the most aggressive types of mortgages]. There will be a loud pop in inflated markets. It's where prices were artificially inflated by people buying houses with risky mortgages that we'll see problems. ... The person who feels the pinch is the person who used an aggressive mortgage and is struggling to meet the mortgage payments.
posted by grim 10 comments
Runaway Housing
I came across this commentary/opinion piece from "News With Views" this morning. I'll add a disclaimer here, I don't know who this outlet is, or what their agenda might be. I just thought this piece was interesting, so I'm going post it up:
RUNAWAY MARKET
By Jon Christian Ryter
The price of the typical 3-bedroom, 3-bath, 3,000-plus square foot American home is skyrocketing beyond the ability of the atypical American consumer to purchase one—or keep up with the spiraling payments. The mortgage payment dilemma is based in large part on the creative financing plans that are used today to qualify moderate-income buyers for mortgage loans that everyone knows is well beyond the ability of the average wage earner to pay when the full mortgage payment matures in three to five years. On the other end of the home market spectrum—because of the megaprices being charged for older dwellings that were affordably priced homes less than two years ago—new home sales are plummeting because existing homeowners who want to "move up," are finding fewer takers for overpriced older homes. In many parts of the country, the sellers' market has completely vanished. The "bidding wars" where prospective home buyers start at the asking price and compete with one another has been replaced with an ugly bearish buyers' market where consumers are balking at Realtor-inflated older home prices that have more than doubled in the past couple of years.
In many boom markets oversold homeowners are trying to refinance mushrooming mortgage payments that have resulted from the unique forms of creative financing that put them in homes they simply couldn't afford and should not have purchased. Fixed rate mortgages that were sold with 0% interest for one or two year years suddenly becomes mortgages with 6% interest—and the mortgage payments that they could barely afford at 0% have ballooned. Or the homeowner was cajoled into taking an adjustable rate mortgage that is spiraling out of control each anniversary as the Fed continues to increase the prime rate to slow inflation—at the expense of home owners who were assured by overzealous mortgage brokers that the low interest gravy train express would not slow down in their lifetime.
Now, in many of the slowing real estate markets, new home owners are being asked how much of their genuine equity—the down payments and the principle paid in their monthly mortgage payments—they are willing to lose to get rid of their expensive albatross. For many, the American dream is fast becoming the Nightmare on Elm Street. One such home buyer is San Diego homeowner Cortney Henderson who celebrated her graduation from UCLA San Diego with a Ph.D. in biomedical engineering by purchasing a modest new home—for $540 thousand. Her home is a simple one-story bungalow with an attached garage—the kind of house you'd find in Montana or Idaho, or Rudyard or Trout Lake, Michigan for $85,000 to $99,000.
...
Henderson should never have been given a half million dollar loan—regardless of her credit score. Her $27,000.00 down payment (she earned her down payment as an egg donor at a fertility clinic—something you fertile housewives might think about when you and your husband are trying to find the down payment for your new home) helped cinch the deal. The rule-of-thumb used by mortgage bankers to determine if you can afford the house you want to purchase is whether your fixed monthly debt obligations—not just your mortgage—are less than 25% of your net income. In Henderson's case, her mortgage payment (including insurance and taxes) ate up 70% of her gross earnings. If it was not for the $700 a month her boyfriend kicked in to help her, Henderson would have already lost her home. If she has an ARM [adjustable rate mortgage], the odds are better than even that she would be forced to sacrifice her home in a "get-out-from-under-the-mortgage" fire sale within a year or two. That's because, San Diego is viewed as one of a dozen markets where major home pricing "corrections" are about to take place. If that happens, Henderson will be stuck with a home priced well above market, and will likely be forced to dump the house for less than the current balance of her mortgage to get rid of it.
Exhaustion.
This dishrag is wrung out as far as it will go. Fully agree with anon who said there would simply be no one left to buy.
And would you WANT to buy one of the currently built sh*tboxes AT ANY PRICE. Think about it!
After over forty years in all phases of construction, major appliance installation, and remodeling, I would not go near anything built after 1980, 99.9 % garbage. “Too much chrome where it shows, not enough quality where it doesn’t"
I expect to see a repeat of the late 80's, with unfinished developments sitting abandoned and unfinished, for years!
The Real Estate related Businesses, Gov't, Media and Socially CONTROLLED PSYCHE of the American Consumer HABIT and MENTALITY of trying to "Keep UP with the Jones" Attitude had a lot to do with this.
It's going to be the SHOCK of a LIFETIME when a large portion of lower and middle America dicover that the "Jones" are in Foreclosure and that THEY ARE their BANKRUPT next door neighbours !
Gross materialism and rampant consumerism.
It was all of the above. The rise in interest rates made it more difficult for the marginal buyer, a large fraction of which are flippers/short term "investors".
The early ones wake up, and start to sell, and you get the double whammy of their not buying, but also selling. This causes inventory to explode, and then the word gets out to the less aware. Eventually, it affects even "normal" buyers who decide to wait, submit low ball offers, etc.
Prices are "sticky" for a while before the plunge since sellers want the old price, flippers need to get "even", and builders try to keep the list price up by throwing in $80,000 worth of incentives, upgrades, etc.
All predictable if you have been on this and other boards for the last year, or lived through the late 1980's bubble.
As much as I hate the democrats, they were not the cause. Just the good old free market system going to excess, and then correcting itself when left to its own devices.
"Just the good old free market system going to excess, and then correcting itself when left to its own devices."
Ain't gonna happen this go round. Uncle Sam will have to bail out these fools because the alternative will be economic collapse. Watch as the new "D" Congress and the Federal Reserve swing into action to save us.
Cote: "Therefor it was the Democrats who in their disgust with the state of current politics have tried to inflame the passions of Americans by trash talking the entire nation until some people here and abroad actually started believing their rhetoric."
You're being sarcastic, right? We should be thanking them for this. Somebody has to challenge the status quo. Your logic is flawed becuase you are inferring that it would be better to have this particular bubble continue indefinitely rather than have some folks speak openly against the policies of the U.S.
Economic reality is the only thing bringing this bubble down.... not people talking smack.
I vote exhaustion. The market reached the point where a combination of "lender denial" / appraisal fraud / insane mortgages were the only way to move properties.
It wasn't interest rates as much as people think. Interest rates could have risen to 8% in 2002, but if people BELEIVE that housing will rise 20% the following year, and they're about to be "priced out" -- they'd still sign on to the 8%.
The market simply rises until there are no more buyers. Only then can PSYCHOLOGY change. What the low interest rates did, was simply qualify more people to become victims.
Another factor: the lack of what economists call "moral hazard" on the part of so many participants in the system. Brokers get paid and move on to the next deal. Appraisers owe their livelihood to the mortgage brokers who give them business, so they have to "hit the mark" or they get blackballed. The mortgage broker will write any deal he can, because it isn't his money being placed at risk. The bank doesn't care, because they sell the loan to Fannie or Freddie, who sell some of that into the bond market. Some guy clipping coupons in Kuala Lumpur is going to get creamed.
Mortgage lending had become a mature, slow-growth business. But corporate "leaders" get paid to grow a business at above average rates. One way to grow a mature business is to lower standards and convert stiffs into customers.
Anon 3:27 said: "Once lending standards return to historical norms, THERE ARE NO MORE BUYERS AT THESE PRICES. Think about it."
And there will be very weary buyers of MBS debt after the current ones get badly burned.
I think the blame is pretty widespread. The root cause was and still is greed and the get rich quick mentality.
What will be bad is watching Jessee "the reverend" Jackson crying fo all those oppressed black folks who gots tricked into these loans by whitey and then spent all the "equity" on bling.
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